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My apologies for the delay in a response. I've been banging my head trying to figure out a cause for your situation, and quite frankly, I'm just not finding anything. Let's run the system file checker from the Recovery Environment and see if that produces a positive result.

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Let's see if that log reveals anything helpful. You'll need the driver.sh script from here on your flash drive.

Boot into xPUD and navigate to the flash drive then click Tool>Open Terminal

Type the following command then press Enter.

bash driver.sh -f

When prompted for the filename to search for type cbs.log and press Enter.

If any copies are found it should show the location on the screen, as well as echo the results to a log named filefind.txt on the flash drive. I expect the cbs.log file to be located in /mnt/sda3/windows/logs - if so, please copy it to your flash drive then attach it to a reply here. If it is too big to attach you can zip it up and upload the zip to my submissions site.

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I must again apologize - I forgot about you (one of the reasons I seldom work topics anymore).

Despite reporting that the sfc results were written to the cbs.log, they were not, meaning they are of no help. I did some testing with a number o files to see if I could reproduce the behavior you're experiencing and the closest I came, albiet slightly different, was in not allowing userinit.exe to load. That said, let's see if replacing yours will help. Repeat the procedure in Post #50 using the replace.txt file attached to this post (delete the one from before).

If there's no change after reboot the only other thing I can suggest is to attempt a repair install. Since your system is a Win7 upgrade, I'm assuming you have a Win7 upgrade dvd. To perform a repair installation you boot with the dvd and choose the Upgrade option at the setup screen. This option will only be available, in my experience, if a previous operating system is detected (although everything I've read, even in the link above, says it is only available from within Windows). If the option is not available to you, you cannot re-install Windows 7 without overwriting all of your existing files, eg; all of your personal files, pictures, etc. would be gone. If you have an external usb drive that you could copy files to, I would suggest seeing if you can backup your data via xPUD before attempting any repairs.